Absent unexpected shocks in world markets, any rate hikes by the Fed this week could see moderate short-term Bitcoin selling pressure as some holders sell and move into safer asset classes that offer improved returns. Seen in isolation, the longer-term effects of a rate hike would likely see capital returning to Bitcoin markets as its effects are felt by businesses and international trading partners. Higher-risk altcoin markets are likely to fall against Bitcoin as they use it as a reserve currency to escape to the safer US dollar.
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US Fed chairman Janet Yellen made her strongest indication to CNBC last month that the Fed is considering raising rates in their upcoming December 14 policy announcement. This comes eight years after the Fed decided low interest rates and relentless money-printing were the panacea to falling stock prices post-GFC. The Fed didn’t like people withdrawing at-risk investments from highly-leveraged firms in a credit crunch, and so this policy succeeded in steering savers’ money back into equity markets. The resulting bubble has been very profitable for those already invested in US equities with the DOW, NASDAQ and S&P 500 all closing at record highs last week.
Changes in the Federal funds rate affect the economy, and currency, bond, and equity markets - which may have a material effect on the price of Bitcoin. Low interest rate environments reduce the return gained from holding US dollars which lowers desire to hold them comparative to other currencies. Bitcoin itself does not bear interest, though its price volatility has been a welcome opportunity for some holders seeking higher return-on-investment while rates have been low. If the Fed raises interest rates next week, the return from holding “safer” US dollars will increase which could lead to some capital flight from Bitcoin into the US dollar.
Altcoin markets could be affected to an even greater degree. Altcoins have lower liquidity than Bitcoin and carry higher volatility risk. There is also a lack of trading pairs with the US dollar which means if their owners’ want to convert to US dollars they will need Bitcoin to act as the conduit. Holders of Ethereum, Dash, Monero and Litecoin would likely fall against Bitcoin as selling-pressure is created to facilitate this process.
Even though a rate hike could see a rise in Bitcoin short-term selling pressure, the longer-term effects of a rate hike in a system seen in complete isolation may completely offset them. Rate rises restrict business growth by increasing the cost of borrowing for firms. And consumers have less discretionary spending to pay firms, which further dampens their income. Investors in US firms consider future company performance when calculating stock prices, which would reflect softened income and growth prospects for US firms. Bitcoin could become a comparatively less attractive alternative to US dollars, but more attractive purchase than stocks.
Also consider that most Bitcoin trading sources from China where devaluations in their Yuan are strongly correlated with rises in Bitcoin price. China peg the value of the Yuan against the US dollar, so when the US dollar rises in value against other currencies thanks to a rates decision, the Yuan follows. The thought of Chinese exports becoming more expensive worldwide would be an untenable position for the People’s Bank of China, who would likely re-peg the Yuan at a lower value against the US dollar to protect their manufacturing industry. Chinese savers are unlikely be thrilled by the loss in purchasing power that would result and may look to Bitcoin as a safe haven. We come full circle.